Moving From Vision to Reality

By the time President Joko Widodo’s anticipated second term concludes in seven years, the current administration hopes to see Indonesia well on its way to escaping the middle-income trap.

From an income per capita expected to range between $5,000 and $6,000 in 2024, policymakers are forecasting the country will be able to join the ranks of high-income economies by the mid-2030s.

By 2045, the official vision is for Indonesia to celebrate its 100th year of independence as one of the top 10 largest economies in the world, with absolute poverty eliminated and inequality significantly reduced. This is the big picture the government sees for Indonesia: A prosperous and equitable nation in less than three decades.

For the fifth year of the US-Indonesia Investment Initiative, a collaborative effort between AmCham Indonesia and the US Chamber of Commerce in Washington, DC, we sat down with key policymakers, business leaders and top analysts to try to determine what the big picture for Indonesia is, how the government plans to achieve it, and the challenges standing in its way. We also outline our recommendations on how go from vision to reality.

Looming large among the government’s efforts to reduce the economy’s heavy dependence on unpredictable commodities and consumption is a drive toward re-industrialization, with a specific focus on value-added manufacturing to maximize use of the country’s abundant resources, and modern services. In this industrialized economy, Indonesia’s traditional heavy lifters –commodities, mining, oil and gas – are expected to play smaller roles as part of a larger overall show. The government has also charted a path toward becoming a $130 billion digital economy by 2020 – the largest in the region by then.

Backing these goals is the largest infrastructure program in the country’s history, spanning everything from roads and ports to power plants and a national broadband network. Recognizing the crucial role the private sector, including foreign investors, will play in fueling this economic growth, President Widodo has also been pushing for greater openness and deregulation. Over the past two years, 16 economic policy reform packages aimed at improving the business environment, including by removing 35 sectors from the Negative Investment List, have been released.

Despite all this, President Widodo’s stated goal of 7 percent economic growth does not appear achievable before his first term ends, with the latest forecasts projecting GDP growth rates of 5.1 percent for 2017 and 5.3 percent for 2018.

Getting there

This is part of where the challenge lies: Development economists say moving from middle-income to high-income status requires difficult structural reforms, but the president’s efforts have so far clashed against deeply ingrained instincts in the bureaucracy to protect perceived national interests, and to control and overregulate the economy.

In attempting to rapidly develop local industries, the government has chosen policy tools – such as banning raw mineral exports to boost processing at home, and using import restrictions and domestic content requirements to force manufacturers to source locally – that come with unintended consequences. As Indonesia Investment Coordinating Board (BKPM) Chairman Thomas Lembong told AmCham and the US Chamber of Commerce, regulations designed to force specific outcomes often drive potential investors away.

While the government says it wants a more liberalized economy, regulations restricting the involvement of foreign investors in Indonesia continue to be issued. Many companies consistently say that new investment plans for Indonesia are held back or delayed by uncertainty in the regulatory environment and worries over compliance issues. These delays are costing the country in terms of growth.

Despite the recognized need to increase private-sector participation, policymaking continues to be done behind closed doors, will little consultation – much less actual input – from the industries being regulated.

The challenge ahead for Indonesia is compounded by the onset of the fourth industrial revolution, which will see technological advancements eliminate several forms of low-skilled labor, and the projected closing of Indonesia’s population bonus window in the 2030s.

For Indonesia to realize the potential everyone knows it has, and for it to attract the foreign investment it needs to help bridge the gap between an average growth rate of 5 percent and 6-7 percent, systemic reforms are needed, including:

Redeveloping a comprehensive approach supported by a clear roadmap that everyone can work toward. Assuming such a roadmap is followed, this would allow investors to see if the country’s direction is aligned with their plans. Each government regulation issued should be in line with the roadmap, which would help create the regulatory consistency and certainty that both foreign and local investors want.

Ensuring this comprehensive approach and roadmap are based on the country’s competitive advantages. While Indonesia’s large population and rich natural resources give it a major edge, it has to be strategic in order to compete with countries that have more skilled labor, better infrastructure and well-developed industries in certain sectors.

Developing regulations transparently based on quality data and sound science, with mandatory public consultation and stakeholder engagement. President Widodo himself has stated that rules, regulations and policies should be made through a transparent process – a standard practice among governments in advanced economies throughout the world. This needs to be put in practice.

Boosting competiveness by investing and regulating for the long term. One consequence of political cycles is the lack of clear planning for the long term and investment in things that don’t generate visible returns in the short term. But investing in things like education reform to develop the graduates needed for the kind of economy Indonesia will have in 20 years’ time is necessary for Indonesia to become – and remain – competitive over the long term.